Borrowers Face Big Delays in Refinancing Mortgages

By

Nick Timiraos And

Ruth Simon

Updated May 9, 2012 11:13 a.m. ET

When Craig Foyer called
Bank of America
Corp.
in March to ask about refinancing the mortgage on his Oconomowoc, Wis., home, a saleswoman told him the company was "swamped with business" and that it would call him back in 60 to 90 days, he says.

"That doesn't do much for someone interested in the market right now," said Mr. Foyer, 46 years old, who works in software development.

ENLARGE

Clogged mortgage pipelines have created headaches for hundreds of thousands of Americans trying to take advantage of low mortgage rates, which averaged 4.05% for the week ending April 27, according to the Mortgage Bankers Association.

Those rates have helped thousands of Americans free up cash or retire debt. On average, borrowers that refinanced during the first quarter of 2012 reduced their first-year interest payments by $2,900, according to mortgage-finance giant Freddie Mac. Overall, refinancing over the past three years has unlocked savings worth $46 billion in their first year, according to Moody's Analytics.

Clogged mortgage pipelines have created headaches for hundreds of thousands of Americans trying to take advantage of low mortgage rates, Ruth Simon reports on Markets Hub. (Photo: Joe Raedle/Getty Images)

But considering how far mortgage rates have dropped, the refinancing burst has been lackluster by historical standards. A surge in demand has come at a time when fewer banks control a larger share of the mortgage market than they did before the financial crisis. Banks also are being more careful about whom they lend money to and how they process loans. It now takes the nation's biggest mortgage lenders an average of more than 70 days to complete a refinance, according to Accenture Credit Services, up from 45 days a year ago.

There is another factor. Amid reduced competition, some large lenders have boosted their rates in a bid to hold down volumes while bolstering profits. That limits the savings for many applicants.

In March, Mark Morrison says he was offered a 4.63% rate by his mortgage company, Ally Financial Inc., when he asked about refinancing. That would have resulted in monthly savings of just $87, before figuring in $1,500 in upfront fees. Rates that week were being quoted at 4.13% in the local newspaper, and the Waukesha, Wis., resident says he "got the runaround" when he asked why his mortgage company couldn't offer him a more competitive rate. An Ally spokeswoman declined to comment.

After shopping around, Mr. Morrison locked in that lower rate with a smaller lender. Accunet Mortgage in Butler, Wis., also offered to pay closing costs, providing Mr. Morrison a monthly savings of $167. He closed on the loan last month after a wait of about three weeks. "It really is a rat's maze for the consumer," says Brian Wickert, Accunet's president. The bigger banks, he says, "have enough people saying 'yes' to those offers that they're taking super-high profit margins."

ENLARGE

Bank of America mortgage services representatives help register people looking for help with their mortgages during the Help for Homeowners Community Event in Miami in February.
Getty Images

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While it is taking lenders of all sizes longer to process loans today, some smaller, more nimble mortgage lenders are turning around loans more quickly because they quickly staffed up or never cut back.

The housing bust wiped away $7 trillion in household equity, leaving many homeowners with too much debt to qualify for new loans. But the mortgage sector's limitations are further undermining the Federal Reserve's effort to boost the economy by holding short-term interest rates near zero.

Normally during a downturn, refinancing activity "really gets the economy going, and it isn't happening right now," says Alan Boyce, a bond-market veteran who runs Absalon, a company backed by billionaire financier George Soros that is pushing to change how U.S. mortgages are financed.

While refinancings from the drop in interest rates since 2009 have produced $46 billion in savings, Mr. Boyce estimated last year that in a normal market, refinancing could have generated an additional $67 billion in annual savings.

Part of the reason is that lenders are being more cautious in the wake of the financial crisis. The two government-controlled mortgage companies, Fannie Mae and Freddie Mac, have added new requirements designed to improve loan quality for all mortgages. Appraisal packages, for instance, must now include a photograph of bathroom toilets as proof the house actually has a bathroom.

Demand for refinancing also has surged in recent months amid a push by the Obama administration to make it easier for homeowners with loans backed by Fannie Mae and Freddie Mac to refinance, even if they don't have any equity in their homes or strong credit. That initiative, called the Home Affordable Refinance Program, has accounted for as much as one-third of refinance applications in recent weeks, according to the Mortgage Bankers Association.

‘The housing bust wiped away $7 trillion in household equity, leaving many homeowners with too much debt to qualify for new loans. But the difficulties in refinancing are further undermining the Fed's effort to boost the economy.’

President Barack Obama is set to renew a legislative push to enable refinancing for underwater borrowers, or those who owe more than their homes are worth, whose loans aren't backed by Fannie and Freddie during a visit to Reno, Nev., on Friday, according to a White House official.

In the past, mortgage companies relied on independent mortgage brokers to help pick up some of the added demand when refinancing spiked. But mortgage brokers now account for less than 10% of originations, down from roughly 31% in 2005, according to Inside Mortgage Finance. The shakeout helped rid the industry of brokers who were making questionable loans, resulting in sounder lending. But it also means there are fewer places for borrowers to turn to find the lowest rates.

"You have more loans going through a pipeline that is too small," says
Terry Moore,
global managing director of Accenture Credit Services, which provides consulting and mortgage-processing services to banks.

The nation's four largest banks now account for 55% of all loan originations, up from 38% in 2004.

Wells Fargo
& Co., the nation's largest mortgage lender; third-ranked
Citigroup
Inc.
; and fourth-ranked Bank of America now routinely advise borrowers to expect refinances to take as long as 90 days. Wells Fargo and Citigroup say they are generally picking up the extra cost of locking in the rate for the longer-than-normal period so that customers are protected if rates rise. Wells Fargo says it has also added staff in response to higher loan volumes.

J.P. Morgan Chase
& Co., the country's second-largest mortgage lender, says it is telling borrowers to generally expect their refinances to close within 45 to 60 days. The bank says it hired more than 1,100 new employees to handle mortgage originations in late 2011 and continues to hire loan officers, underwriters and processors.

Citigroup has been adding staff and streamlining its processes in an effort to cut its average refinance time from 77 days to less than 50 days, says CitiMortgage chief executive
Sanjiv Das.

ENLARGE

Bank of America says beginning in April it no longer put customers like Mr. Foyer on a wait list because it has added 500 employees to handle the latest surge in business. Delays are "vastly improving" from late last year, when a drop in rates caught much of the industry by surprise, said
Matt Vernon,
who heads retail sales for Bank of America Home Loans.

Mr. Foyer ultimately settled on a no-cost refinance with a local mortgage bank for a 3.5% rate on a 15-year mortgage, down from the 4.3% rate on the previous 20-year loan. Mr. Foyer estimates it will save him about $12,000 over the life of the loan. He closed on the loan in April some three weeks after he applied.

Before the mortgage crisis, the spread between the rate lenders paid investors and the rate they charged borrowers averaged around 0.5 percentage point. But that gap has nearly doubled since 2009.

At
U.S. Bancorp
,
mortgage-banking revenue more than doubled during the first quarter from the year-earlier period to $452 million in the first three months of 2012. "It is just a function of supply and demand in the current market and that gives us some pricing opportunity," said
Andy Cecere,
the bank's chief financial officer on a call with analysts in April.

The mortgage industry has long suffered from boom and busts, with loan processing times increasing as refinancings climb. That is being compounded today by the fallout from the mortgage bust.

Lenders have become far more cautious about making new loans because they may have to repurchase bad loans from mortgage giants Fannie and Freddie. The government-controlled firms can force banks to buy back mortgages that run afoul of underwriting rules, and they have stepped up those demands in the aftermath of the mortgage bust.

Fannie asked banks to buy back $24 billion in defaulted mortgages last year, up from $13 billion in 2010. The company didn't report data on repurchases before the crisis, when they were viewed as a minor nuisance.

Lenders have responded to buyback pressures by scrutinizing anything that could be used to justify a costly loan repurchase. CitiMortgage, for instance, now triple-checks borrower income and assets and the appraisals used to determine a property's value.

The normal gridlock can be exacerbated if the borrower is self-employed or if the appraisal comes in lower than expected. A disputed appraisal value spawned Amy Sperrazza's six-month battle before securing a 3.75% fixed rate for her Dawsonville, Ga., home in February.

"It was one thing after another," says Ms. Sperrazza, who began the refinance process last August. She and her husband both are employed and have good credit, but they spent months haggling over the appraisal, which valued the home using the sale of foreclosed properties from a different county.

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